UK economy shrank in late 2012

A street cleaner and a pedestrian walk past the Bank of England in the City of London February 23, 2013.

Reuters/Neil Hall

LONDON (Reuters) - Britain's economy contracted by 0.3 percent in the last quarter of 2012 as first thought, keeping alive the danger of a third recession since 2008, although yearly growth was revised up, data showed on Wednesday.

The weak economy and its detrimental impact on the government's fiscal targets prompted rating agency Moody's to strip Britain of one of its coveted triple-A credit ratings last week.

Chancellor George Osborne will draw little comfort from the latest release, less than a month before he is due to lay out his budget plans for the coming year.

"It really underlines that the growth trajectory into this year is at best weak and could even be falling," said David Tinsley, economist at BNP Paribas.

"The fact that business investment was weak and also revised down for the third quarter was disappointing," he added.

Gross domestic product fell by 0.3 percent in the October-December period compared with the previous three months, in line with the Office for National Statistics' initial estimate and economists' forecasts.

"With political tensions rising in the euro zone due to the inconclusive Italian elections, low consumer confidence at home, signs of still weak bank lending and businesses remaining reluctant to invest due to economic uncertainty, none of the main causes of weak growth have been resolved," said Chris Williamson at Markit.

Still, compared with the previous year, the economy was 0.3 percent bigger - better than the original estimate of flat output, the ONS said, noting upward revisions to some previous quarters.

The sluggish economy has also been a major concern for Bank of England policymakers. Paul Fisher said late on Tuesday that the central bank might need to buy moderate quantities of government bonds over a longer period than before to support output.

Fellow rate-setter Charles Bean said on Wednesday the bank should be open to new ideas given the economic weakness combined with persistently above-target inflation, although he noted risks in nominal GDP targeting.

Output in Britain's service sector - which makes up more than three-quarters of GDP - dipped 0.1 percent in the fourth quarter after growing 1.2 percent in the third quarter.

An index of services data released at the same time showed that output in the sector shrank 0.4 percent in December compared to November, which, according to Tinsley of BNP Paribas, boded ill for the first quarter of this year.

Industrial output was 1.9 percent lower in the fourth quarter, the steepest fall since the first three months of 2009. Construction, which accounts for less than 7 percent of GDP, expanded by 0.9 percent, the fastest rate of growth since the second quarter of 2011.

Economists polled by Reuters expect the economy to eke out quarterly growth of 0.2 percent in the first three months of 2013, narrowly avoiding a renewed recession.

January surveys of purchasing managers showed growth in the service sector, a tick-up in manufacturing and a fall in construction output, also pointing to modest economic growth.

Early survey evidence of how the economy fared in February has been mixed, with factory order books improving but retail sales rising at the slowest annual pace since September.